How to Invest in ETFs: A Beginner’s Guide

Are you curious about investing in exchange-traded funds (ETFs) but don’t know where to start? You're not alone. Many beginner investors find themselves confused by these types of investments. But they can actually be attractive choices for new investors, so it’s worth learning what they’re all about. This guide will walk you through everything you need to know about how to invest in ETFs—what they are, why they can be beneficial, and how to invest in them with confidence. Whether you're a brand-new investor or a financial literacy enthusiast eager to expand your investing strategy, this is your chance to find out if ETFs are right for your portfolio.

An ETF is is a basket of different securities collected into a single fund you can buy shares of The fund holds a collection of assets such as stocks, bonds, and other securities like real estate or commodities. When you buy shares of the fund, you buy a little piece of every security it holds. 

ETFs are very similar to mutual funds—both types of investment vehicles pool a variety of securities into a single fund. The main difference is that ETFs are traded on stock exchanges, just like shares of stock. That means they’re bought and sold throughout the trading day at market prices, and you can buy shares of an ETF through your brokerage account.

Investing in ETFs can give you a higher level of diversification, because you gain exposure to multiple securities instead of putting all your eggs in one basket with a single stock. This helps spread risk and potentially enhances returns by capturing gains from different sectors or asset classes. One reason beginning investors might want to consider investing in ETFs is to make diversifying their portfolios easier at the outset.

Why beginners love ETFs

If you're new to investing, ETFs might just be your best friend. Their benefits go beyond diversification, offering several advantages that appeal to beginner investors. 

Lower costs

First and foremost, ETFs tend to have lower costs compared to some other investment options. Since they are usually passively managed, ETFs typically charge lower fees than mutual funds, helping ensure high fees don’t eat into your returns. ETFs can also be more tax efficient. Because they tend to distribute smaller capital gains, your tax burden can be lower compared to stocks and mutual funds.

Flexibility

Flexibility is another key advantage of ETFs. Because they’re traded on stock exchanges, investors can buy and sell them at any time during the trading day; in contrast, mutual funds only trade at the end of the trading day. This flexibility means you have the freedom to react quickly to market changes.

Variety

Additionally, ETFs provide easy access to a wide range of asset classes and sectors. Whether you're interested in investing in the S&P 500, emerging markets, or even Bitcoin ETFs, you're likely to find an ETF that aligns with your investment goals and interests. This variety makes it easier to find a fund that aligns with your risk tolerance and financial goals. Start by identifying your investment goals and risk tolerance. Are you looking for steady income, long-term growth, or capital preservation? Clarifying your objectives will help narrow down your options and guide your decision-making process.

Step 1. Open an investment account

Just like investing in stocks and other securities, you can’t buy ETFs directly on the stock market; you’re required to open a brokerage account. A brokerage account is a taxable investment account you use to buy and sell securities, including ETFs, through a licensed brokerage firm. You deposit funds into your account, and your brokerage uses that money to buy and sell the securities you select on your behalf. 

As an investor, you decide how involved you want to be in managing your brokerage account. More experienced, hands-on investors may want to take a DIY approach. If you’re a beginner or don’t want to devote large amounts of time to managing your portfolio by yourself, you may elect to have a financial advisor or the brokerage’s robo-advisor take on the management for you. Regardless of the method you choose, you can specify your risk tolerance, investing time horizon, and long-term goals to customize your investing experience. 

Opening a brokerage account online is relatively simple. Be prepared to share personal information like your name, social security number, date of birth, contact information, forms of identification, and financial status when you open your investment account. Once your account is open, you’ll deposit money and select whatever stocks, funds, or other securities you’d like to buy.

What to look for in a brokerage

There are several factors to consider when you’re looking for the right brokerage to meet your needs:

• Management options: Whether you opt for a traditional brokerage firm or an online or app-based brokerage, look for one that offers the level of guidance and management you need.

• Convenience: If easy access to your account is important to you, consider that online brokers allow you to access your information and submit transaction requests from your computer or phone 24/7, while traditional brokerages may not.

• Investing options: Ensure that your brokerage offers the kind of securities you want to buy, like ETFs, mutual funds, stocks, bonds, commodities, or even cryptocurrency.

• Fees: Additionally, consider how much you’re willing to pay in fees. Nearly all brokerages charge fees, but they vary considerably.

• Balance requirements: Finally, take a look at the brokerage’s balance and minimum deposit requirements to ensure they line up with your budget.

Get Started

Step 2. Research ETFs to buy

Once you’ve opened your brokerage account, it’s time to research which ETFs you want to purchase. As you explore, keep in mind your investment objectives so you can choose the one that best supports your investment goals, risk tolerance, and personal interests. Research each fund’s holdings and its track record of performance over time. If you’re investing in a market or sector ETF, decide which index you want to track, whether it’s the S&P 500, the Dow, or something else. Also, consider the costs and operating expense ratios of the funds you’re considering. 

In addition to deciding which ETFs to purchase shares of, you’ll want to decide how many to invest in. While that number depends on your budget and investment strategy, financial experts generally recommend keeping up to 10 ETFs in your portfolio. If your brokerage offers fractional shares, you may be able to put money into multiple ETFs even if you don’t have a large sum of money to invest at the beginning. 

Types of ETFs you can invest in

The world of ETFs is vast, and there are lots of types to investigate. The number of ETFs available in the United States has grown steadily over the last twenty years, with more than 2,600 available today. Most have a particular focus or objective, like matching the performance of an index, investing in specific sectors, or implementing a specific investment strategy.

ETFs can be passively or actively managed. Passive ETFs generally follow a buy-and-hold investing strategy that tracks a benchmark; many of the funds listed below are usually considered passive ETFs. Active ETFs, on the other hand, have a manager making decisions about portfolio allocation and, if they track an index, they may deviate from it based on the fund management’s strategy.

• Market ETFs: Also called equity funds, these ETFs could be lower risk since they try to accurately reproduce the performance of a specific index.

• Sector ETFs: These funds aim to match the overall performance of an index, like Market ETFs, but sector ETFs focus on a specific sector or industry.

• Thematic ETFs: These funds target a subset of a sector, so they’re even more narrowly focused than sector ETFs.

• Bond ETFs: Also called fixed-income ETFs, these funds invest exclusively in bonds. They’re often considered lower risk since bonds tend to be less volatile than stocks.

• Commodity ETFs: Some commodity ETFs actually purchase commodities, like gold, oil, and agricultural goods, while others invest in companies that produce or handle those commodities. 

• Foreign market ETFs: These funds attempt to mirror a non-US index, like Japan’s Nikkei Index.

• Currency ETFs: Also called foreign currency ETFs, these funds track the relative value of one or more currencies. 

• Inverse ETFs: These funds require active management, as they’re designed to increase in price when a given market index declines in price and can be relatively high-risk. 

• Leveraged ETFs: These funds follow a risky investment strategy that uses borrowed funds to buy options and futures to increase the impact of price movements.

Step 3. Purchase your chosen ETFs

You’ve done the research, and now it’s time to make your ETF purchase through your brokerage. If you’re using an online brokerage or app, start by searching for the ETF you’ve chosen by entering its stock ticker symbol. You may be able to purchase directly from the ETF’s entry if you’re using your brokerage’s research tools. Select your ETF and enter the number of shares you wish to purchase. Then submit and confirm your order. Congratulations, you’ve just purchased your first ETF.

Step 4. Set up a regular investing schedule

Once you’ve made your first investment, it’s important to set up a regular investing schedule. When you take a dollar-cost averaging approach today, you may be more likely to build wealth over the long term. Whether monthly, weekly, or quarterly, set up a regular transfer from your bank account to your investment account so that investing becomes a habit. Maintaining a regular investing schedule could help you mitigate the risk of mistiming the market, diversify the average cost of shares over time, and reduce the potential stress of investing. 

Avoiding common pitfalls in ETF investing

Investing in ETFs can provide many benefits, but it's essential to be aware of common mistakes that beginners often make. One of the most frequent errors is failing to conduct thorough research before investing. Take the time to understand the ETF's holdings and performance history. If the ETF tracks an index, be sure to research exactly what the index tracks and its historical performance. 

Another common mistake is over-diversification. While diversification is a key benefit of ETFs, investing in too many ETFs can lead to overlapping exposures and dilution of returns. Aim for a balanced portfolio that provides diversification without unnecessary complexity.

Finally, avoid letting emotions drive your investment decisions. While you can buy and sell ETF shares throughout the trading day, hasty decisions can undermine your long-term strategy. Market fluctuations are normal, and reacting impulsively can lead to costly mistakes. Develop a well-thought-out investment plan and stick to it, even during periods of market volatility.

Looking ahead the future of ETF investing

The landscape of ETF investing is constantly evolving, with exciting trends shaping the industry. Technology continues to play a pivotal role, with advancements in AI and data analytics enabling innovations ETF management and trading.

Emerging sectors, such as socially responsible investing (SRI), are gaining traction among investors. ETFs focusing on sustainable and socially responsible investments are becoming increasingly popular, providing opportunities for investors to align their portfolios with their values.

Additionally, the rise of thematic ETFs allows investors to capitalize on specific trends and innovations, such as renewable energy, biotechnology, or the digital economy. These ETFs offer targeted exposure to high-growth areas and can complement traditional investment strategies.

Start your ETF investing journey

Beginner investors may find that ETFs are a useful way to build diversity into their portfolios as they’re learning how to start investing.Investing in ETFs can be a relatively easy and flexible way to start diversifying your portfolio. By understanding the basics, selecting the right ETFs, and staying informed about industry trends, you can confidently embark on your investment journey.

Now that you know how to invest in ETFs, getting started can be simple. You can open a brokerage account online in minutes, explore the wide range of ETFs available, and begin building a portfolio that aligns with your aspirations.

Invest in ETFs with a diverse and defensive strategy

Beginner investors may find that ETFs are a useful way to build diversity into their portfolios as they’re learning how to start investing. Investing in ETFs can be a relatively easy and flexible way to start diversifying your portfolio. With more than 90 ETF options available, plus the option for fractional shares, Stash can help you get started.

Investing made easy.

Start today with any dollar amount.

Get Started